EC 303 - Banking and Financial Mgmt

EC 303 - JSU - Banking and Financial Mgmt

True

True or False:
A commercial bank’s balance sheet is how it keeps track of it’s assets and liabilities.

assets ; liabilities

A commercial bank’s balance sheet is how it keeps track of it’s _____ and _______.

balance

A commercial bank’s ______ sheet is how it keeps track of it’s assets and liabilities.

liabilities

A bank’s _______ can also be considered sources of funds.

1- Checkable deposits

2- Non-transaction deposits

savings deposits and small denomination time deposits

large denomination time deposits

3- Borrowing, includes

discount loans from the Fed

loans from other commercial banks

4- Bank capital

assets minus liabilities

A bank’s liabilities can also be considered sources of funds. What can be considered liabilities?

it’s liabilities plus its bank capital.

A bank’s assets must equal:

assets

A commercial bank earns income from its _________.

1- Reserves

Reserves held at the Fed (required and excess)

vault cash

2- Cash items in the collection process

A deposited check that has not been paid by the issuing bank

3- Deposits at other banks

4- Securities

U.S. gov’t, State & Local Gov’t, Mortgage-backed Securities, among

others

5- Loans

commercial, real estate, consumer

6- Other assets

physical assets owned by a bank

The asset side of the balance sheet also lists uses of bank funds:

T-account

A ________ keeps track of the changes in assets and liabilities.

Vault

_______ cash is included in bank reserves.

bank reserves.

Vault cash is included in ________ ___________.

deposits

When a bank receives _______, it receives an equal amount of reserves.

reserves

When a bank receives deposits, it receives an equal amount of ________.

reserves

When a bank loses deposits, it loses an equal amount of ________.

settlement balances

Reserves are also called___________ because they are used to settle transactions between banks.

transactions ; banks

Reserves are also called settlement balances because they are used to settle _______ between ________.

interest

Gamecock Bank can earn more _______ by making loans or purchasing securities.

loans ; securities

Gamecock Bank can earn more interest by making _____ or purchasing _________.

exceeds

The bank can make a profit if the income from the loan interest _______ the cost of servicing the checkable deposits.

Asset transformation

Selling liabilities with one set of characteristics and purchasing assets with a different set of characteristics.

long-term ; short-term

Gamecock Bank has created a _____________ asset (loan) and issued a ________ liability (checkable deposit).

10

Minimum reserve ratio is _____%.

1- Borrow from another commercial bank (interest on borrowing determined by the Federal Funds Rate)

2- Sell off securities (ideally short-term U.S. securities) or use the Standing Repo Facility

3- Borrow from the Federal Reserve (interest on borrowing determined by the Discount Rate)

4- Reduce loan holdings

5- Can be done by refusing to renew short-term loans that are due (“calling-in” the loan)

6- Can be done by selling loans to another bank.

What can a bank do to ensure that it meets its reserve ratio?

withdrawals

Banks may hold reserves to protect against deposit __________, which may be costly.

1- Maximize returns on loans and securities.

2. Reduce risk.

3. Maintain adequate liquidity.

Asset management should satisfy three broad goals. What are those three goals?

finding low default risk borrowers who will pay high interest rates

Banks seek to maximize returns on loans by:

return on assets

A basic measure of profitability is:

profit / assets

What is the formula for ROA?

return per dollar of equity capital,

or return on equity:

A bank’s owners are interested in the:

profit / capital equity

What is the formula for return on equity?

equity multiplier

ROE and ROA are linked by the ___________.

after-tax net profit / equity capital

=

after-tax net profit/ assets

×

assets /equity capital

where assets / equity capital is the equity multiplier.

What is the formula for equity multiplier?

inverse

Given the return on assets, there is an ________ relationship between the level of bank capital and the return on equity.

the level of bank capital and the return on equity.

Given the return on assets, there is an inverse relationship between:

macroeconomic conditions and the confidence of bank managers

The proper amount of bank capital depends on:

Higher level of bank capital reduces the probability of bankruptcy

Higher level of bank capital reduces the return on equity

Trade-off between safety and returns to equity holders:

capital

Higher level of bank _____ reduces the probability of bankruptcy

return on equity

Higher level of bank capital reduces the ___________.

adverse selection ; moral hazard

Banks want to reduce the risk of ___________ and _________.

screening consumer and business loan applicants

specialization in lending

Monitoring/Enforcement of restrictive covenants

Some ways that banks can mitigate asymmetric information is through:

makes monitoring easier

threat of losing a long-term lender can protect against risky behavior

Long-term relationships:

long-term relationship

The following describe what:
makes monitoring easier

threat of losing a long-term lender can protect against risky behavior

guarantees to provide borrowers with funds up through a specific

time at a set rate

fosters a long-term relationship

Loan commitments:

lender protected in the case of default

borrower has extra incentive not to engage in risky behavior

Collateral/compensating balances:

refusing to lend at any interest rate

refusing to lend beyond a certain amount

Credit rationing:

decline

A bank with more rate-sensitive liabilities than assets will see a ______ in profits if these rates increase and vice versa if these rate decrease.

True

True or False:
A bank with more rate-sensitive liabilities than assets will see a decline in profits if these rates increase and vice versa if these rate decrease.

Maturity bucket approach

Performs gap analysis for several maturity sub-intervals

Standardized gap analysis

Accounts for different degrees of rate sensitivity.

Duration Analysis

Uses the weighted average duration of a financial institution’s assets and of its liabilities to see how its net worth responds to an interest rate change.

Duration Analysis

The following is the equation for what:

%ΔMarket Value of Security ≈ −Δi × Duration in Years

Bank

Loan Sales
Generating Fee Income
Trading Activities

What are the off balance sheet activities?